PepsiCo (PEP) stock is down 12% from its May peaks heading into its Q4 earnings release on Friday, February 9. Despite this decline, the stock has outperformed the Zacks Consumer Staples sector and rival Coca-Cola (KO) over the last decade. PepsiCo presents an intriguing investment opportunity, supported by a solid dividend yield and impressive valuation levels.
The Basic Bull Case
PepsiCo’s portfolio includes popular brands such as Gatorade, Tostitos, Pepsi, Bubly, and more. The company has demonstrated significant growth in recent years, effectively adapting to evolving dietary trends and navigating challenges from emerging competitors and its core rival, Coca-Cola. This success has propelled PEP shares on a strong upward trajectory post-Covid, with a robust start to 2023.
However, the stock experienced a downward trend as investor concerns grew about the increasing use of weight loss drugs and their potential impact on PepsiCo, Coca-Cola, and other consumer staples brands, amidst the backdrop of rising interest rates. The broader selloff in the consumer staples sector was also triggered by diminishing dividend yields due to higher interest rates.
Despite this, the current economic landscape indicates an upcoming reversal in interest rate trends, with the Federal Reserve likely to implement rate cuts in 2024. This development positions PepsiCo’s attractive 2.9% dividend yield, which surpasses SPY’s 1.3% and equals KO’s 3.0%, as an increasingly appealing option. Furthermore, PepsiCo’s strong financial performance and future outlook reflect the enduring robustness of the soda and snacks industry, notwithstanding changing consumer preferences.
PepsiCo’s sales are projected to surge by 7% in FY23 and over 4% in FY24, reaching $96.05 billion in 2024, up from $86.39 billion in the previous year. Following a 9% sales growth last year and a 13% revenue increase in FY21, the company is slated for sustained expansion. Additionally, its adjusted EPS is expected to grow by more than 11% this year and further by 7.4% in FY24.
Other Fundamentals
Although PEP has a Zacks Rank #3 (Hold) due to its stagnant earnings revisions, it has consistently outperformed our quarterly EPS estimates over the past five years. Notably, PepsiCo shares have surged by 115% over the last decade, surpassing the Zacks Consumer Staples sector’s 21% and Coca-Cola’s 60%. Expanding the view to 20 years, PEP has soared by 230% compared to Coca-Cola’s 140% and its sector’s 71%.
Furthermore, while PEP has increased by 22% in the last three years, it is currently trading at a level similar to that of the previous year. The stock is down 12% from its peaks and is trading 11% below its average Zacks price target. After finding support at its 200-week moving average, PEP has climbed 9% since mid-October. Additionally, the stock is trading above its 50-day moving average and hovering around neutral RSI levels on a 10-year timeframe.
Valuation-wise, PepsiCo is trading at a 22% discount to its highs with a forward P/E ratio of 20.9X, slightly below its 10-year median and that of KO, despite its notable outperformance.
Bottom Line
While purchasing stocks before earnings to capitalize on a potential rebound is a high-risk strategy, long-term investors may find compelling reasons to consider buying and holding PepsiCo stock. The historical resilience of PepsiCo’s stock price, coupled with its current valuation, presents an attractive proposition for investors aiming for long-term growth.
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